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Currency pairs, also known as forex, measure the value of one currency against another.
The currency pair can be split into the ‘base’ currency, which is the first named currency; and the secondary currency, which is called the ‘quote’ currency. The price displayed shows how much of the quote currency is required to buy one unit of the base currency.
When trading forex the base currency is always quoted first, and is the currency you are buying. For example, if you buy pound versus US dollar (GBP/USD), you are anticipating a rise in the pound at the expense of the US dollar.
This is the secondary, or 'quote', currency in an exchange rate and can sometimes be referred to as the 'term' or 'counter' currency. Profit and loss is normally expressed in the amount of the secondary currency in forex.
Bid and offer
Every currency pair has a bid and an offer price. This is the rate at which you can buy a currency, and the rate at which you can sell a currency. The price maker (usually a broker) gives you a rate at which they are willing to buy or sell a currency pair.
The table below illustrates basic bid and offer prices.
|Currency pair||Quotation||Bid||Offer||Client buys||Client sells|
|EUR / USD||1.1200/01||1.1200||1.1201||1.1201||1.1200|
|EUR / GBP||0.7210/11||0.7210||0.7211||0.7211||0.7210|
|AUD / JPY||84.35/38||84.35||84.38||84.38||84.38|
|USD / JPY||119.97/119.99||119.97||119.99||119.99||119.97|
|USD / CHF||0.9628/0.9630||0.9628||0.9630||0.9630||0.9628|
The last decimal place to which a particular exchange rate is usually quoted is referred to as a point or ‘pip’. Some online forex providers typically quote no more than a fixed 1-point spread between the bid and offer on major currency pairs, and liquid cross rates in normal market conditions.
It's important to remember when looking at forex that a higher currency makes a country's exports more expensive for other countries, while making imports cheaper. A lower currency makes exports cheaper and imports more expensive, so foreign exchange rates play a significant part in determining the trading relationship between two countries. There are a variety of factors at play in this relationship and they all contribute in some way to whether the strength of a currency declines or improves in relation to another. Understanding the influencing factors gives traders insights they can incorporate into their forex trading strategies.
Some of these factors include political stability, interest rates, inflation, terms of trade, public debt and current account deficits. For example, in the case of interest rates, if rates are higher, lenders get a better return compared to those in a country with lower rates; therefore the higher rates attract foreign capital which causes the exchange rate to rise. This is one of the reasons forex traders may look to trade on interest rate announcements from central banks like the US Federal Reserve or the Bank of England.
The factors mentioned above can also cause a currency to decline. For example, the currency of a country with low inflation will generally rise because that country's purchasing power is higher relative to other currencies. Even natural disasters such as earthquakes or tsunamis, which put a strain on a nation’s economy, can have a negative impact on a currency.
Political instability and poor economic performance can also have a negative impact on a currency. Politically stable countries with robust economic performance will always be more appealing to foreign investors, so these countries will draw investment away from countries characterised by more economic or political risk. Furthermore, a country showing a sharp decline in economic performance will experience a loss of confidence in its currency and a movement of capital to currencies of more economically steady countries. These are just two simple examples of what can affect foreign exchange rates and the kind of things traders consider when developing forex trading strategies.
For more information about why forex pairs may move, visit our introduction to factors that affect currency pairs.
At CMC Markets, we offer CFD prices on over 300 forex pairs, including all the major currency crosses. Our spreads for AUD/USD and EUR/USD start from 0.7 points, while our GBP/USD and EUR/GBP spreads start from just 0.9 points.
We offer consistently low spreads on a number of popular currency pairs, and our typical forex spreads are a reflection of our pricing consistency through the day.
|Product||Minimum spread from*||Margin rate from|
*A minimum spread is the lowest spread that will be shown on the given product. Minimum spread will vary subject to after-hours trading. If the underlying market spread widens throughout the trading day, or you are trading out of hours, the platform spread may also widen. The spreads shown are for the first price available for the average market trade/bet sizes in the relevant product. The spread will widen for larger trade/bet sizes, see our platform for more information.